Which of the following shifts money demand to the right?
A) an increase in the price level and the interest rate
B) an increase in the price level and a decrease in the interest rate
C) a decrease in the interest rate but not a change in the price level
D) an increase in the price level but not a change in the interest rate

Question

Quizplus · Accepted Answer

An increase in the price level (inflation) shifts money demand to the right as individuals and firms need more money to engage in transactions due to the higher prices. A change in interest rates alone (choice C) does not shift money demand, as it only affects the cost of borrowing and lending money. A decrease in interest rates (choice B) actually shifts money demand to the left, as it reduces the opportunity cost of holding money and encourages individuals and firms to invest in other assets like stocks or bonds. A combination of an increase in the price level and a decrease in interest rates (choice A) could potentially shift money demand to the right, but the effect would depend on the magnitude of each factor and their impact on individuals' and firms' demand for money.

Which of the Following Shifts Money Demand to the Right